Russell 2000 gaining for a fourteenth day

Volumes have been poor through US equity markets (some 20% below the 30-day average) which is hardly a surprise given the upcoming Thanksgiving holiday, but the juggernaut that is the bull market continues, albeit slowly.

The Russell 2000 (the small cap index) is where the real momentum is and the index is up 0.2%, gaining for an incredible fourteenth day.

If we are looking for a sector lead for Asian markets, we would look at the S&P 500 and here we can see buying most notably in energy, industrials and telcos.

We have seen a plethora of US data points released, with durable goods, University of Michigan consumer confidence and existing homes sales all beating expectations, while new home sales were a touch under expectations. The November Federal Open Market Committee (FOMC) minutes were also released (in the latter stages of US trade) and the underlying message is we should expect a December hike, although it was interesting that the central bank actually admitted that ‘some argued a hike should come at the Federal Reserve’s December meeting to preserve credibility’. It feels like they have admitted being influenced by the market here and one could argue this actually impacts their credibility. Either way, the argument is over, and they are raising in December.

The wash-up of this data flow is further selling in US treasuries, notably in the shorter-term two- and five-year maturities. The two-year US treasury is currently at 1.12% and the highest levels since 2010 and of course this all means buying USDs, specifically against the JPY. USD/JPY has rallied 1.2% and as mentioned (in prior reports), the current yield premium you can achieve in the US fixed income market relative to other developed markets will limit any pullback in the pair. Expect the Nikkei 225 to appreciate on open thanks to the move in the currency. Again, if you want to hedge or profit from a ‘make America normal again’ trade, the best way is through the Japanese equity market, and specifically the banks.

AUD/USD has seen a very interesting move, as key technical levels are currently being respected here and this could be very important. Fundamentally, we can see the influence of a sell-off in emerging markets (EM) overnight being a headwind for the AUD (AUD is seen as a proxy of EM). We have also seen a mixed bag in our key terms of trade, and while iron ore futures have pushed 3.1% higher (spot closed up +1.3%), we can see steel and coking coal futures largely unchanged. AUD/USD rallied too, but was rejected through a wave of sellers and supply at the 13 September low of $0.7442. We haven’t seen much follow-through selling though, but it is clear that the market wants to defend this level, so a break above here would suggest a short-term trading buy. My preference here though is to actually buy AUD/NZD as a trade.

Staying in the commodity theme, perhaps two of the bigger stories of the night have been the sizeable 2.8% rally in copper (+2.8%), while gold has gone the opposite way, trading firmly below $1200. Gold has simply just followed the USD, so you might as well have been trading the currency markets. The selling really accelerated through $1207, but it appears as though the metal will close through the key $1200 level (the series of lows through February to May) and in my opinion as long as US bonds are sold, so will gold. Gold looked like a great investment when we saw an ever-increasing world of negative yielding interest rates, but given the level of outstanding bonds with a negative yield has almost halved (now $7.6 trillion) since Trump was elected, the fact that gold has no yield makes it less attractive on a relative basis.

The market asks why buy gold when you can get a 2.35% yield to maturity in the US bond market? However, fear not gold bulls, as despite the USD and US fixed income seen as a major headwind, there are a number of indicators that suggest we could be seeing exhaustion in the selling and a reversal on the cards. As always, price action should be respected.

Turning to equities, our ASX 200 call is basically unchanged. After a 133-point rally in the past two days, a breather of sorts shouldn’t surprise, however, I wouldn’t be surprised to see traders buying into any weakness from around 10.30am (AEDT) and if we do get a close through 5500 (the October highs) then that will tell a lot about improving semantics. It’s hard to pinpoint where the buying would come from today as there are no real clear leads for markets, although Aussie bonds are likely to weigh on yield-sensitive stocks and oil is basically unchanged from yesterday’s 4.10pm market close. I guess we go with the view that what’s has been working will continue working, so buy pullbacks in stocks that are red hot right now – there are quite a few of them about. Momentum and trend are key.